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Environment, Asset Characteristics, and Optimal Effluent Fees

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  • Jyh-Bang Jou

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    Abstract

    This article investigates theissue of optimal effluent fees in a frameworkwhere waste emissions are abated by investingin capital of which the pay-off is uncertainand the cost is fully sunk. The stock of wasteemissions harms an individual firm'sproduction, but the firm will underestimatethis external effect upon investing. Consequently, the firm will invest lesscapital, and thereby, pollute more than issocially desirable. The regulator, who can useeffluent fees to correct this, should imposelower effluent fees on irreversible investmentsthan on costlessly reversible ones whenuncertainty arises. Copyright Kluwer Academic Publishers 2001

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    File URL: http://hdl.handle.net/10.1023/A:1017524910959
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    Bibliographic Info

    Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

    Volume (Year): 20 (2001)
    Issue (Month): 1 (September)
    Pages: 27-39

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    Handle: RePEc:kap:enreec:v:20:y:2001:i:1:p:27-39

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    Web page: http://www.springerlink.com/link.asp?id=100263

    Related research

    Keywords: effluent fees; environmental externality; irreversible investment; real options;

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    1. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June.
    2. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    3. Anastasios Xepapadeas, 1999. "Environmental Policy and Firm Behavior: Abatement Investment and Location Decisions Under Uncertainty and Irreversibility," NBER Technical Working Papers 0243, National Bureau of Economic Research, Inc.
    4. Gaudet, Gerard & Lasserre, Pierre & Van Long, Ngo, 1998. "Real investment decisions under adjustment costs and asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 23(1), pages 71-95, September.
    5. Glazer, Amihai, 1997. "Inducing investments and regulating externalities by command versus taxes," Energy Policy, Elsevier, vol. 25(2), pages 255-257, February.
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    7. Bovenberg, A.L. & Mooij, R.A. de, 1997. "Environmental tax reforms and endogenous growth," Open Access publications from Tilburg University urn:nbn:nl:ui:12-74434, Tilburg University.
    8. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
    9. Glazer, Amihai, 1997. "Inducing investments and regulating externalities by command versus taxes," University of California Transportation Center, Working Papers qt4hx0h53n, University of California Transportation Center.
    10. Farzin, Y. H., 1996. "Optimal pricing of environmental and natural resource use with stock externalities," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 31-57, October.
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    14. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
    15. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    16. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
    17. Dixit, Avinash, 1997. "Investment and Employment Dynamics in the Short Run and the Long Run," Oxford Economic Papers, Oxford University Press, vol. 49(1), pages 1-20, January.
    18. Kort, P.M., 1996. "Pollution control and the dynamics of the firm: The effects of market based instruments on optimal firm investments," Open Access publications from Tilburg University urn:nbn:nl:ui:12-72142, Tilburg University.
    19. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    20. Kongsted, Hans Christian, 1996. "Entry and exit decisions under uncertainty: The limiting deterministic case," Economics Letters, Elsevier, vol. 51(1), pages 77-82, April.
    21. Bovenberg, A.L. & Smulders, S., 1993. "Environmental Quality and Pollution-Saving Technological Change in Two- Sector Endogenous Growth Model," Papers 9321, Tilburg - Center for Economic Research.
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    Cited by:
    1. Lee, Tan & Jou, Jyh-Bang, 2007. "The regulation of optimal development density," Journal of Housing Economics, Elsevier, vol. 16(1), pages 21-36, March.

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